AOL-Yahoo Would Be A Mess Of A Merger

Speculation over a possible merger of Yahoo and AOL have arisen, and the AOL CEO is reportedly engaging in talks with Yahoo’s advisers following the departure of ex-CEO Carol Bartz. [1] The big question however is what do these two organizations have to offer to each other in terms of synergies? We believe the answer is not an encouraging one, and the only synergy between AOL and Yahoo at the moment is a common set of problems such as leadership uncertainty, struggling to confront competitors and a failure to capitalize on current mega trends. Both Yahoo and AOL continue to struggle in the online advertising market against competitors such as Google and Facebook.

The most obvious and immediate gain of a possible Yahoo-AOL merger is scale. As of July 2011 both Yahoo and AOL still feature among the top 5 sites in the U.S. with around 178 million and 105 million unique visitors respectively. [2]

What has plagued both the companies however is the capability to monetize this traffic – something which Google and Facebook have excelled at in recent years. In addition, both Yahoo and AOL have a host of similar organizational issues:

Leadership: After the unceremonious dumping of Carol Bartz over the phone, [3] future leadership is at best muddled with an interim-CEO and a so-called “circle of elders” or the executive council at the helm. As of now, there is no clear idea as to who the front-man would be and what is envisioned for Yahoo’s future.

Quite co-incidentally, AOL’s TechCrunch problems also came at a similar time, raising doubts within the company as to what happens to Arrington’s role in AOL, as well as conflicting statements from top leaders within AOL. The TechCrunch fiasco not only resulted in bad PR, but also suggested that there is ample confusion within the top ranks of AOL.

Failure to Capitalize on “Mega-Trends”: While both Yahoo and AOL were relevant businesses in the early-2000s, both have failed to capitalize on new technology and web trends of today. They have little presence in the mobile platform (which Android and Apple dominate) and even less exposure in the social networking arena where Facebook is +750 million strong.

Thus, in the event of a merger, none of these 2 companies would have anything new to offer to each other in terms of technology. It’s like putting two horse-wagons together hoping that they would start flying like a plane.

Non-Aligned Assets: Both AOL and Yahoo have their set of non-aligned assets whose future hangs in the balance. While Yahoo’s Asian investments are highly valuable, the company seems to have little control over the management of these assets, especially in China (Alibaba). Additionally, AOL still has its own dial-up subscription business, which has managed to stick on despite its obsolescence. Whether these assets will be spun-off or sold is something both companies need to thoroughly consider.

Given the above issues, both Yahoo and AOL need to get their act straight before considering a merger. Starting points can be to peel off non-aligned assets which do not generate sufficient cash, better control (or unlocking) of Yahoo’s Asian assets as well as continued focus on generating the maximum monetization out of their display ads unit(s).

Given the uphill nature of these tasks, a merger would only serve to complicate things further, with hefty costs paid to banks, as well as a lot of money and time spent on re-structuring and re-organizing the combined company. In the meantime, Apple, Google and Facebook will keep chugging along, leaving these 2 erstwhile internet behemoths even further behind.

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